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View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Texas A&M Repository THE ECONOMICS OF THE U.S. AUTOMOTIVE INDUSTRY: STUDIES ON REGULATION AND COMPETITION A Dissertation by EPHRAIM KARSAGI Submitted to the Office of Graduate and Professional Studies of Texas A&M University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Chair of Committee, Steven Puller Committee Members, Yonghong An Fernando Luco Venkatesh Shankar Head of Department, Timothy Gronberg August 2018 Major Subject: Economics Copyright 2018 Ephraim Karsagi ABSTRACT This dissertation is about the U.S. automobile industry. In the first part, I study an environmen- tal policy that ascribes a fee or a rebate to each new vehicle in the marketplace, depending on the vehicle’s fuel economy rating; thus, it is called a ’feebate’. Feebates can be designed to reach op- timal outcomes given assumptions on people’s preferences and welfare from buying cars. Since a feebate is a function from fuel economy ratings to cash, I study how feebate functional form affects the efficacy of the policy as well as some distributional outcomes. I conclude that a feebate policy, represented by a logistic functional form in which larger portions of consumers face high marginal incentives to increase fuel economy, brings about improved outcomes over other functional forms. The second part of this dissertation explores the nature of local competition and tests the exis- tence of local market power held by car dealerships. In the empirical model, I exploit variation in local competition that is caused by factors external to the dynamics of local demand and supply. I compare the pricing response of dealerships in affected local markets relative to the pricing be- havior of dealerships in markets which were not affected. I find that decreased competition caused consumers to pay higher prices for their vehicles both through a sales mix, as well as a negotiations, mechanism. I find evidence that dealers target consumers strategically, as the incidence of the price increases falls disproportionately on buyers of SUVs who engaged in a secondary transaction of a trade-in. I conclude that dealers exercise local market power when afforded by consumers who signal higher willingness to pay and bargaining disutilities. ii DEDICATION To my wife, Alyssa, and to my sons, Eytan and Aryel. iii ACKNOWLEDGMENTS I would like to thank the Texas A&M Department of Economics, my dissertation committee members, my adviser, Steve Puller, the Department of Economics at the University of Haifa, the Center for Financial Research at the Federal Deposit Insurance Corporation, and seminar partici- pants at the Federal Trade Commission for their valuable comments and suggestions. I thank Texas A&M University for the resources and opportunities for interdisciplinary communication and col- laboration. I thank the Texas A&M Energy Research Society for organizing events and conferences on campus conducive to networking and professional development. I thank the participants of the 2016 and 2017 A&M Conferences on Energy, and participants of the 54th annual conference of the Missouri Valley Economics Association for their useful suggestions and comments. I thank Lisa Adams for reviewing and correcting grammar and syntax mistakes, and for ensuring a smooth read for readers of this dissertation. All errors are my own. iv CONTRIBUTORS AND FUNDING SOURCES Contributors This work was supported by a dissertation committee chaired by my adviser, Professor Steven L. Puller, and with Assistant Professors Yonghong An and Fernando Luco of the Department of Economics, and Professor Venkatesh Shankar of the Department of Marketing as members. Jeremy West of the Economics Department at the University of California at Santa Cruz initially prepared some of the Texas DMV and DataOne data sets while a PhD student at Texas A&M. All other work conducted for this dissertation was completed by the student independently. Funding Sources Graduate study was supported by a doctoral merit fellowship from Texas A&M University and departmental funding through research and teaching assistantships. I gratefully acknowl- edge financial assistance through research assistantships funded by the National Science Foun- dation—Industry/University Cooperative Research Center, “Electric Vehicle—Transportation and Electricity Convergence” (8/1/2010–11/30/2014, Award #1034995). v NOMENCLATURE CAFE Corporate Average Fuel Economy Standard GM General Motors MPG Miles per Gallon NMNL Nested Multinomial Logit Model GPM Gallons per Mile (or Gallons per 100 Miles) SUV Sport Utility Vehicle DMV Department of Motor Vehicles VIN Vehicle Identification Number MSRP Manufacturer Suggested Retail Price HP Horsepower PC Perfect Competition NAFTA North American Free Trade Agreement BLP Berry, Levisohn, and Pakes Econometrica 1995 GMM General Method of Moments APEEP Air Pollution Emissions Experiment and Policy EPA Environmental Protection Agency RMA Relevant Market Area HHI Herfindahl-Hirschman Index TXDMV Texas Department of Motor Vehicles FTC Federal Trade Commission MSA Metropolitan Statistical Area DOJ U.S. Department of Justice vi VSP Vehicle Sales Price FMC Ford Motor Company OLS Ordinary Least Squares IV Instrumental Variables vii TABLE OF CONTENTS Page ABSTRACT............................................................................................. ii DEDICATION .......................................................................................... iii ACKNOWLEDGMENTS ............................................................................. iv CONTRIBUTORS AND FUNDING SOURCES ................................................... v NOMENCLATURE .................................................................................... vi TABLE OF CONTENTS .............................................................................. viii LIST OF FIGURES .................................................................................... x LIST OF TABLES...................................................................................... xii 1. INTRODUCTION.................................................................................. 1 1.1 Optimal Feebates ............................................................................ 1 1.2 Competition Dynamics among Car Dealerships .......................................... 2 2. REDUCING EMISSIONS FROM PASSENGER CARS: THE ROLE OF FUNCTIONAL FORM IN DESIGNING OPTIMAL FEEBATES............................................... 5 2.1 Fee-Bate Systems: Past, Present, and Future .............................................. 11 2.2 Data ........................................................................................... 17 2.3 Model ......................................................................................... 20 2.4 Estimation .................................................................................... 28 2.4.1 Demand and Marginal Costs....................................................... 28 2.4.2 Optimal FeeBates ................................................................... 33 2.5 Results ........................................................................................ 38 2.5.1 Price Sensitivity, Taste Parameters, and Marginal Costs ........................ 38 2.5.2 Elasticities and Markups ........................................................... 41 2.5.3 Welfare Simulations ................................................................ 43 3. COMPETITION DYNAMICS IN RETAIL AUTO SALES: QUASI-EXPERIMENTAL EVIDENCE FROM LOCAL DEALERSHIPS .................................................. 53 3.1 Debate over Direct Distribution ............................................................ 59 3.2 Data ........................................................................................... 64 viii 3.3 Intra-Brand Competition – A Descriptive Analysis ...................................... 70 3.4 Model ......................................................................................... 78 3.4.1 The Effects of Market Concentration – Instrumental Variables Approach............ 82 3.4.2 Dealers’ Response to a Sudden Exit: The Cases of Saturn and Pontiac .............. 88 3.5 Results ........................................................................................ 92 3.5.1 The Effects of the Herfindahl-Hirschman Index on Prices............................ 93 3.5.2 Difference-in-Differences .......................................................... 102 3.5.3 Discussion ........................................................................... 108 4. SUMMARY AND CONCLUSIONS ............................................................ 111 4.1 Conclusions regarding Optimal Feebates .................................................. 111 4.2 Conclusions regarding Competition among Local Dealerships and the Automotive Distribution Franchise Laws ................................................................ 112 4.3 Challenges and Further Study .............................................................. 113 REFERENCES ......................................................................................... 115 APPENDIX A. PROOF: MATHEMATICAL PROPERTIES OF THE PROPOSED FEE- BATE FUNCTIONS ............................................................................... 121 APPENDIX B. DEMAND ELASTICITIES TABLES............................................. 125 ix LIST OF FIGURES FIGURE Page 2.1 Example of an Actual Feebate

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